The Rhythm of Change

Employed physicians, self-distribution, among topics at the Distributor Insights conference

ATLANTA—Change is definitely in the air. What remains to be seen is how it will affect contracting executives and their relationships with clinicians and distributors.

A group of IDN supply chain executives told distributors and manufacturers at the recent Distributor Insights conference that physicians in their communities are approaching them about becoming employed by the multihospital systems. “They’re tired,” said one IDN executive, speaking about physicians. “They want work/life balance, they’re sick of handling billing.” The IDN can provide the financial infrastructure those practices need to remain viable.

But the IDNs want something too. Supply chain executives want to instill some discipline into their newly acquired physician practices. They expect physicians to be more rigorous in their evaluation of new products and in establishing and adhering to med/surg “formularies.” They also expect them to be more conscious of inventory control.

At the same time, the executives know that, just as they can’t fully control physicians on staff, they can’t dictate what their newly employed physicians will do. “They are the most willful employees of all,” said one of the executives. So, rather than dictate change, supply chain executives expect that they will have to work with their physicians to effect change. And they appear to be doing just that, moving market share in powerful ways, particularly with high-ticket “physician preference” items, such as implants.

Distributor Insights is a two-day forum that brings together distributors, manufacturers and providers to discuss healthcare and supply chain issues. It is sponsored by MDSI, publisher of the Journal of Healthcare Contracting.

Message to suppliers
Contracting executives had a simple message for suppliers: Change the way you approach physicians. “If you really have new products, we need them,” said Rosalind Parkinson, director of material systems, The Ohio State University Medical Center. “But we need to learn about them in a different way.” Suppliers should follow IDN procedures for vendor access to clinical decision-makers. And they will be asked to defend their prices. What’s more, in some cases, IDNs may opt to act as distributors to their physicians, cutting out their physician suppliers altogether.

Though the landscape may be changing, distributors shouldn’t despair, according to those who spoke at the conference. For one thing, although anecdotal evidence suggests that physicians are seeking employment by IDNs in large numbers, the statistics being cited are wildly divergent. Furthermore, distributors that clearly convey their value to supply chain executives, and then deliver it, will probably be OK.

Piedmont
Piedmont comprises several acute-care hospitals as well as two physician practices, with a total of more than 330 physicians. The IDN spends about $350 million a year on supplies, pharmaceuticals and equipment. Its medical practices account for about $2 million of that amount.

Though Piedmont has its own distribution center, it does not provide distribution services to its physicians’ offices, said Colonna. That said, it does provide support to physicians in the form of negotiating contracts, such as service agreements and agreements for office supplies and biomedical equipment services. Colonna said that GroupSource, an affiliate of the group purchasing organization MedAssets, has helped Piedmont physicians save approximately $200,000.

Physicians in the employ
Ohio State is a relatively small IDN, said Parkinson, comprising 1,200 beds, 45 outpatient sites and 140 affiliated physician practices. About 30 percent of the practices are owned by Ohio State – a change that occurred largely between 2008 and today. And she expects the percentage to get much larger quickly.

“Physician affiliation with big provider groups is changing, as we speak today,” noted Parkinson. “I notice the rhythm of that change every day.”

The trend toward physician employment began before healthcare reform became law, said Parkinson. “Physicians see that consolidated provider organizations might include them. They hear that hospitals will acquire physician practices, and figure that maybe it’s better if they begin the process now. They read about accountable care organizations and think, maybe it’s better to be affiliated with the hospital, which has the financial infrastructure [they lack]. And they know cost management will be a priority for everyone in the system.

“Cost management is key here,” said Parkinson. That’s something that has been lacking in many physician practices. “We see physicians as having a supply chain that’s relationship-based, with frequent customer/sales interaction. We feel that replenishment processes are reactive. There’s a very low level of standardization; and the technology used for replenishment is very antiquated.” Hospital supply chain executives can help bring change in these areas.

“We are contract-based in our hospital supply chain,” said Parkinson. “We’re 97 percent compliant. And we have introduced that part of our culture in our outpatient sites. We have formal relationships with our suppliers, with regularly scheduled interaction.” The Ohio State supply chain team regularly conducts quality reviews of products, and expects vendors to supply data to support their product claims.

The inpatient supply chain rests on scheduled, template-based replenishment systems, added Parkinson. “There’s an emphasis on appropriate levels of inventory being held at various levels, from the end user site, to the distributor, to the supplier. It’s a whole chain of logistics, which starts with demand.” Physician practices that become part of the Ohio State system can expect to become part of that chain.

Finally, said Parkinson, Ohio State expects its physicians to adhere to a med/surg “formulary,” which calls for end users to use only agreed-upon products.

“We have an item master for items used in physicians’ offices, and we keep it very focused,” she said. Only 6,000 items are included, though physicians do have access to other catalogs for products that fall beyond their day-to-day needs.

Highly integrated IDN
North Mississippi Health Services provides healthcare to 24 counties in northern Mississippi and northwest Alabama, explained Switzer. The IDN has six hospitals, 34 clinics and four nursing homes. Of a total of 350 employed physicians, about 110 are employed in the IDN’s clinic system, and the remainder are hospital-based.

The IDN is highly integrated from a supply chain point of view. It has a centralized warehouse, referred to as the logistics center (which is licensed as a drug wholesaler and manufacturing warehouse); a courier fleet; centralized purchasing and contracting; standardization of supplies; one e-procurement system for all entities; and a centralized laundry. It is building a centralized offsite sterile processing facility, which should be operational by the end of next year.

Setting up warehouses is old hat for Switzer, who has built several distribution centers in the past while working for for-profit and non-profit healthcare providers. North Mississippi self-distributes many of its med/surg supplies, but still uses distributors, particularly for smaller-volume items. “We have to be self-sufficient,” explained Switzer, “because in winter, we can be cut off from two days to a week” due to icy road conditions. The other issue is fill rate. Prior to acting as its own distributor, North Mississippi was experiencing fill rates of a little over 90 percent.

Radical reorg
Carilion Clinic comprises eight acute-care hospitals and a number of urgent/primary care and other treatment facilities. Carilion owns 53 primary care practices and 83 specialty practices throughout southwestern Virginia, employs 600 physicians, and continues to take on more physicians. Until 2006, the IDN was known as Carilion Health System. But in that year, administration began a radical reorganization, which led to its current structure.

In 2010, Carilion formed an accountable care organization, or ACO, and is involved in a demonstration project with the Brookings Institution and Dartmouth Institute for Health Policy and Clinical Practice. Accountable care organizations were a big topic of conversation and angst at the conference. ACOs were created by the Patient Protection and Affordable Care Act, otherwise known as the healthcare reform law. The federal government has yet to issue definitive guidelines on ACOs, but it intends to reward inpatient and outpatient providers who work in tandem to provide care for specific patient populations, and who provide a measurable, high quality of care.

Carilion Clinic has made a substantial investment in bringing on hundreds of physicians since 2006, pointed out Tarantino. It has been a “major financial commitment,” made that much more challenging by the collapse of the capital markets in 2008. But Tarantino believes that unless inpatient providers make substantial changes in their organizations, they will not thrive in a changing healthcare environment.

“In one more year, we think, hospitals will be fined or denied payment by [the Centers for Medicare & Medicaid Services] if a patient is readmitted for the same condition within 30 days,” she said. The government is moving away from reimbursing providers for episodic care. Instead, the emphasis is on keeping patients out of the hospital. “We have to reinvent ourselves.”

In order to continue its mission, Carilion works diligently to reduce non-labor expenses, including supplies as well as purchased services, said Tarantino. The IDN is a Premier member, but uses Novation contracts as backups. And Tarantino is open to local, custom deals. “If you want to bring a local deal to us, that’s great; we’ll look at it,” she said.

Carilion chose to act as its own distributor some time ago, pulling about $14 million of purchases from its prime vendor in 1999. Today, it uses Cardinal Health as a backup, and uses PSS for what Tarantino calls a “hybrid approach” to supplying its 147 physician practices. The IDN is pursuing cost-savings wherever it can. With the help of Carilion’s clinical staff, Premier healthcare alliance and the consulting firm Deloitte & Touche, the IDN was able to identify $15 million in supply chain opportunities and implement $8 million in recurring and one-time cost reductions in FY10. The team managed to find savings in some unusual places. For example, Carilion saved $40,000 by bidding out bread, and it saved $72,000 merely by making everybody drink the same kind of coffee. Tarantino formed a new department to centralize sourcing, value analysis and contracting functions.

Getting new products in the door
Even in those circumstances where IDNs employ physicians, supply chain executives can only influence – not dictate – what those physicians do, according to those at the conference. Said Colonna, any supply chain executive who tells a supplier that he or she can deliver 100 percent market share from the IDN’s physicians is bluffing. In fact, Piedmont has made a decision to avoid pressing for the least expensive product. Rather, it is pursuing those products and technologies that will result in the best outcomes. “We say to our physicians, ‘Help us get the things you need,’” he said.

“Anticipate change,” said Parkinson to the roomful of manufacturers and distributors. “We have the opposite perspective from you. The winners will be those who join us to think about the common ground we share. Physicians and hospitals need the quality products you provide, and we need them to be provided in the most efficient way.” Meanwhile, manufacturers need to take advantage of distributors’ expertise in taking waste out of the supply chain, in the form of transportation costs, space considerations, FTE costs and price.

“Do your homework about the quality of your products,” she continued. “You have to help provide the data that shows why we need to change what we’re doing, [and how your product can help us] improve satisfaction for provider and patient, at a lower cost.

“Finally, you need to be thinking about alternate strategies for product introductions,” Parkinson said. Suppliers may resent the sophisticated infrastructures IDNs have put in place to evaluate new products. “The best thing you can do is learn about them,” she said. “Become educated on how hospitals are evaluating products, what these product-evaluation committees are, and what ways you can work with purchasing folks to bring new information to the institution.”

Tarantino also asked suppliers to adhere to the IDN’s protocols for introducing new products. “My department says, ‘Sell to us.’ We meet with vendors six hours a day. We have a very defined process; we run cost analyses, and we take opportunities forward.” Carilion has three value analysis teams, and physicians sit on all of them. Though the IDN emphasizes value and product quality above all else, it also expects fair pricing, she said. “We’re really scrutinizing the data and asking, ‘Is this product worth it?’” The supply chain teams include clinical resource managers and RNs.

No one on the panel predicted a widespread shift by IDNs to self-distribution. “We recognize there is a tremendous skill set in distribution,” said Parkinson.

“There’s a short half life of technology that continues to improve efficiency, both in warehouses and over the Internet, and our distributor is constantly reinvesting in that technology.” Ohio State would have a tough time keeping up with such technology while continuously working to improve patient care.

That said, others, including Carilion and North Mississippi, have made the choice to self-distribute to one degree or another. “I don’t see everybody doing what we’re doing,” said Switzer. In fact, he said, there are probably no more than a couple dozen IDNs that could attempt it. Still, more IDNs are hiring supply chain executives from industry to help them improve their operations, he pointed out. That trend, in turn, could lead to more self-distribution models.

Tough love
The contracting executives were joined by a panel of distribution executives: John Sasen, chief marketing officer for PSS World Medical; Kenny Wilson, vice president and general manager, ambulatory care, Cardinal Health; Doug Shaver, senior vice president, strategy and business development, McKesson Medical-Surgical; and Bill Barr, general manager for healthcare services, Henry Schein.

The distributor executives might not have liked all they heard, but they seemed prepared to deal with it. And they urged manufacturers to do so the same.
“It’s great that IDNs are talking about [med/surg] formularies,” said Cardinal Health’s Wilson. “To manufacturers, we say, ‘We love you, but things have changed. We will have to carry fewer products in our warehouses.’

“We’re working for [manufacturer] partners who are willing to understand the concept of total cost,” he continued. “We are looking at formularies we can bring to these IDNs. And if I’m a manufacturer, I have to be thinking about this too.”

PSS’s Sasen, meanwhile, emphasized that because of their very different service-level requirements, physician offices will continue to need assistance from their primary care distributors. Many physicians’ offices, even those that have been acquired by IDNs, are fairly small and lack the services of purchasing agents or materials managers.

What’s more, physicians’ offices often experience a high degree of turnover, said Sasen, who raised this scenario: Suppose the person in the office who has been trained to run the chemistry analyzer decides to take another job. The practice’s routine could be disrupted. It’s in cases like this that the sales rep can help keep that practice running and productive. Similarly, many skilled nursing facilities continue to need the assistance of their primary care distributor reps to run efficiently.